Is Your Defined Benefit Plan Ready for Termination? Part V
Part 5 – Data Quality and Conclusion
This post is the last in a 5-part series on plan termination readiness. In prior weeks, we discussed funded status [Part II and Part III] and plan administration [Part IV]. This week, we’ll wrap things up with a discussion of data quality.
Every pension plan administrator understands the importance of data. There are the basics: date of birth, date of hire, pay history, breaks in service, etc. Then there is non-employment data, like home address and beneficiary information. Depending on the plan, some administrators even need to track sick or vacation time, or employee contributions. This is an integral part of plan management, and all plan administrators understand the importance of accurate data.
At the same time, most administrators will tell you that their data is far from perfect. Payroll systems change and historical data gets archived. Terminated vested participants fail to keep their contact information up to date and fall off the radar. Form-of-payment elections and beneficiary information remain on paper files until the retiree in question dies. For an ongoing plan, these issues are common, and not likely to cause major headaches or problems. When the time comes to terminate, however, these types of data issues can all be major roadblocks to success.
During the termination process, sponsors need to be able to communicate with each and every participant, and need to provide detailed information on each participant’s benefits. Each participant will receive a Notice of Plan Benefits (NOPB). For recent retirees and not-in-pay participants, this notice will need to include the historical data that supports the benefit they earned in the plan. For longer-term retirees, the NOPB will need to include the benefit amount, form of payment, and beneficiary information. Missing or inaccurate information can cause delays and serious problems upon plan termination. The PBGC will review NOPB samples, so it is critical that the notice is complete and accurate.
During the plan termination process, having up-to-date contact information for all participants is essential to ensure that required notices are received and benefit elections can be made and processed. While returned mail is an obvious indicator of bad addresses, this only captures a subset of the bad addresses. Address searches and outreach campaigns in advance of plan termination can find additional address issues and ensure all participants are reachable once the plan termination process is underway.
Additionally, sponsors will want up-to-date information on participant and beneficiary deaths. For ongoing administration, most plans rely on notification from the beneficiary or estate for a participant’s death. Often, beneficiary deaths are not tracked while the participant is alive. These practices are common for going plans. However, at termination, out-of-date information can result in overpaying benefits and overstating liabilities. Death audits should be performed to avoid these situations; the process of cleaning this up after the fact is often much more time consuming than ongoing prevention processes.
Action items: In advance of plan termination:
• A detailed review of participant data, including the quality level of accrued benefits, addresses, and demographic information, should be performed.
• Missing information should be noted and accrued benefits certified. It will be easier to improve the data quality and find missing information now than it would be at plan termination.
• Death audits should be performed to true up beneficiary information and verify whether terminated vested participants are still alive. The process of cleaning up this data during the termination is more time consuming and could lead to overfunding.
In Conclusion: How do I know if I’m ready to terminate?
We started this series with the saying “All good things must come to an end.” That applies to blogs as well as pension plans! The key for both is making sure that “the End” is a good one.
As we’ve discussed over the last month, there are a number of areas plan sponsors need to assess before embarking on the actual plan termination process. Evaluating the plan’s funded status on a plan termination basis is a necessary first step [Part II]. But it is also necessary to focus on other matters than can impede the termination. Sponsors will also want to:
• Assess funded status risk and devise a plan for mitigating risks as the plan gets closer to terminating;
• Clean up and verify plan administration including election forms, notices, and plan documents; and
• Ensure that all necessary data is collected and validated.
Getting prepared for a successful plan termination takes time and effort. Neglecting any of the steps we have discussed these past four weeks can jeopardize a plan getting to a good End.